As you approach the age of 73, there is one critical deadline you cannot afford to ignore: taking your Required Minimum Distribution (RMD) from your Individual Retirement Account (IRA) or other retirement plans. Missing this deadline can result in hefty penalties, and understanding the rules can save you time, stress, and money. Let us break it down so you know exactly what you need to do.
What is the required minimum distribution (RMD) for IRAs?
If you are 73 or older, the IRS requires you to withdraw a certain amount of money from your traditional IRA or other retirement plans annually. This is called the Required Minimum Distribution (RMD). The RMD ensures that the government gets its share of taxes on your retirement savings, as withdrawals are treated as taxable income.
If you turned 73 in 2024, your first RMD must be taken by April 1, 2025. However, waiting until then means you will need to take two RMDs in 2025—one by April 1 and another by December 31. This can increase your taxable income for the year, so it is something to plan carefully.
Why the RMD deadline is important
Missing the RMD deadline can be costly. If you fail to take the full RMD amount by the due date, you face a 25% excise tax on the amount not withdrawn. The penalty can be reduced to 10% if you correct the mistake within two years. But why put yourself in a position to pay penalties when a timely withdrawal avoids all of that?
How to calculate your RMD
Calculating your RMD might seem complicated, but it boils down to a few key steps:
- Find your account balance: Use the value of your IRA or retirement plan as of December 31 of the previous year.
- Use the IRS life expectancy table: This table provides a divisor based on your age. Divide your account balance by the factor corresponding to your age to determine your RMD.
Some IRA providers will calculate the RMD for you, but the responsibility ultimately lies with you to ensure the correct amount is withdrawn.
What if you have multiple retirement accounts?
If you have multiple traditional IRAs, you can withdraw the total RMD amount from one or more accounts, as long as the total meets the required amount. However, RMDs for other types of retirement plans like 401(k)s must be taken separately from each account. Failing to withdraw from the right accounts can lead to penalties, so double-check your plan’s rules.
Are Roth IRAs subject to RMD rules?
Good news for Roth IRA owners: you do not have to take RMDs during your lifetime. However, if you inherited a Roth IRA, you might be subject to RMD rules depending on your relationship to the original owner. Be sure to review the specifics if you are a beneficiary.
Good news for Social Security retirees – Here’s the 2025 payment schedule for SSI and SSDI checks
Tips to avoid RMD mistakes
Avoiding penalties and ensuring compliance is straightforward if you keep these tips in mind:
- Mark your calendar: Know the deadlines for both your first and subsequent RMDs.
- Work with a professional: A financial advisor or tax professional can help calculate your RMD accurately.
- Double-check your provider: Confirm that your IRA or plan administrator has accurate information about your account balance and age.
- Plan withdrawals strategically: If you are taking your first RMD, consider whether spreading the withdrawals over two years will benefit your tax situation.
